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First-Year Bonus Depreciation Increased to 100 Percent

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was signed into law by President Obama on Dec. 17, 2010. The legislation includes an extension of the Small Business Jobs and Credit Act of 2010's "bonus depreciation" allowance through the end of 2011, and increases that amount from 50 percent to100 percent. H.R. 4853 temporarily provides 100-percent bonus depreciation for investments, such as company vehicles, placed in service after Sept. 8, 2010 through Dec. 31, 2011. (Bonus depreciation returns to 50 percent for investments placed in service after Dec. 31, 2011 through Dec. 31, 2012.)

Under the new H.R. 4853 bonus depreciation schedule, businesses may immediately write-off 100-percent of the cost of depreciable property acquired in the same calendar year, providing the equipment is used in the U.S. The equipment must be new, and original use of the equipment must commence with the taxpayer claiming the depreciation bonus between Sep. 8, 2010 and Jan. 1, 2012.

Also, to be eligible for the 100-percent bonus depreciation, the equipment must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a depreciation recovery period of 20 years or less. Typically, businesses recover the cost of equipment and other capital investments through specified MACRS depreciation deductions. Under this system, cars have a five-year life and the recovery deductions by year are 20 percent, 32 percent, 19.2 percent, 11.5 percent, and 5.8 percent. Allowing companies to depreciate 100-percent of the purchase price in the first year lowers a company's tax liability for the year in which new equipment (such as a fleet vehicle) is put in service.

In addition to the 100-percent bonus depreciation, there are several other fleet-related provisions in H.R. 4853:

Biodiesel and renewable diesel tax credits. The law extends through 2011 the $1 per gallon production tax credit for biodiesel. In addition, it retroactively reinstates the biodiesel tax incentive for 2010. The bill also extends through 2011 the $1 per gallon production tax credit for diesel created from biomass.

Ethanol tax credit. The law extends through 2011 the per-gallon tax credits and outlay payments for ethanol.

Sixth Time this Decade

H.R. 4853 is the sixth time this decade that first-year bonus depreciation has been used as an economic stimulus. It was first introduced in March 2002, after the terrorist attacks of Sept. 11, 2001. At that time, Congress passed H.R. 3090, known as the Economic Security and Recovery Act of 2001, which provided a 30-percent bonus depreciation for a three-year period. In May 2003, the Jobs and Growth Tax Relief Reconciliation Act increased first-year bonus depreciation to 50 percent. This temporary change in the tax code expired Jan. 1, 2005. In 2008 and 2009, Congress temporarily allowed businesses to recover the costs of capital expenditures faster than the current depreciation schedule. In September 2010, the Small Business Jobs Act (H.R. 5297) added an additional year of 50-percent bonus depreciation for qualifying property purchased and placed in service in 2010.

Economists rate bonus depreciation as one of the most productive economic stimulus initiatives. The Institute for Policy Innovation estimated every tax dollar dedicated to accelerated depreciation results in approximately $9 of GDP growth.

Critics argue bonus depreciation will not substantially benefit commercial fleets in the long run because it is quickly recaptured when a vehicle is remarketed. If you resell an asset fairly rapidly, as do commercial fleets, you give back the bonus depreciation in the form of recapture. However, bonus depreciation provision benefits fleets with long-life assets, such as trucks, off-road inventory, and other specialty equipment.

"One-hundred percent depreciation does provide a bigger benefit for those fleets that hold assets for a longer period of time. However, a company that owns its vehicles would have to give back only a portion, not all of the 100-percent depreciation by recapture. A fleet that holds a vehicle for three years, for example, could depreciate $16,000 in the first year. This compares to $10,910 over three years (IRS Rev. Proc. 2010-18). Recapture depends on the value of the vehicle when remarketed," said Pat O'Connor, president of Kent & O'Connor, the legislative counsel for the NAFA Fleet Management Association. "Whether bonus depreciation for an owned fleet provides a tax advantage with respect to the company's overall capital investment strategy needs to be addressed on a case-by-case basis."

Market Trends

Procurement underperforms in cross-collaboration initiatives with other corporate spend categories, such as Environment, Health & Safety (EHS) and supply-chain management. A key collaboration opportunity is in the area of fleet safety.

A fleet cost reduction program goes straight to the corporate bottom line. If a company operates at a 10% annual net profit margin, reducing annual fleet expenses by $100,000 is the equivalent of generating $1 million in sales. Although fleet managers manage hundreds of thousands to tens of millions of dollars in corporate assets, only half are incentivized to achieve targeted performance goals. I advocate incentivization should be a universal best practice extended to all fleet managers.

I believe volume penetration of fleets by autonomous vehicles will take much longer to occur than what is predicted in today’s optimistic forecasts. Conceptually, autonomous vehicles are technologically feasible, but, as they say, the devil is in the details. One thing is certain, as we trail blaze new ground, so too will we trail blaze new problems.

Corporate mobility management to evolve into multi-level responsibilities for asset lifecycle management, administration of multi-modal mobility services, and deployment of productivity and safety tools to support a mobile workforce in the field.

The key objective of end-user discussions is to match the truck with the fleet application. Once you have completed your discussions, make sure the completed upfit specs have been reviewed and approved by all parties prior to order placement. It is critical to have a documented sign-off to avoid misunderstandings that result in after-the-fact upfitting modifications.

Recently, I conducted a survey of several hundred fleet managers to identify emerging industry trends. One recurrent theme expressed by fleet managers was the concern that fleet costs are starting to experience upward pricing pressures. Here's what they told me.

A growing number of employees are using their company vehicles as a tool to generate supplemental personal income for themselves. Unscrupulous service technicians are known to use company vans to moonlight for their personal business. Fleet managers must be vigilant about the unauthorized use of corporate assets and aggressively implement preventive measures.

Over the years, I have known many competent fleet managers. But, like salmons swimming upstream, not every promising fleet manager survives the challenges and rigors of day-to-day fleet management. It is understandable when fleet managers are fired for making expensive mistakes or when caught engaging in ethical transgressions, but, sadly, many more are terminated for circumstances that are entirely avoidable.

Although fleet management is a relatively new career segment, changes are percolating that threaten to transform it from a career path to a corporate stepping stone. The confluence of three fleet megatrends will be the catalyst fueling this transition.

Vehicle specifications should be defined by the fleet application and mission requirements. A truism in truck fleet management is to design a truck that will accommodate your operational requirements rather than trying to make your operation conform to the truck. Here's how you do it.

At a fundamental level, the fleet management industry is an aggregator of data upon which it executes actions designed to optimize vehicle asset lifecycle – from acquisition to disposal – and to fine-tune operational efficiencies to maximize employee productivity. A cognitive computing platform, such as IBM Watson, would thrive in this type of data-rich environment.

Can a branded vocational vehicle be ticketed for being parked in an employee driver’s home driveway? Or, can it be subject to a fine if legally parked overnight on the side of a street? Before you say no, think again. These discriminatory practices occur regularly when vocational vehicles are parked in residential areas governed by a homeowner association (HOA). In fact, the type of restrictions implemented against vocational or branded vehicles can run the gamut and are at the whim of the HOA.

The value of face-to-face meetings is beginning to be questioned by younger generation employees who have only known a world interconnected by the internet, social media, and FaceTime. In particular, they question the cost-effectiveness of traveling by car from point A to point B, its negative impact on corporate sustainability goals, the inefficient use of time lost behind the wheel of a vehicle, and more.

For many managers responsible for vehicle operations, fleet management is often one of several job responsibilities. These managers acknowledge that it is difficult to stay on top of changes in vehicle design, powertrains, onboard safety technology, telematics capabilities, and regulatory changes that impact fleet operations. Despite this recognition, a common mistake made by many of these managers is underutilizing the subject-matter expertise of current and/or prospective suppliers.

In the next decade, the term "fleet management" will soon become inadequate to fully define the scope of our industry and it will be viewed as an anachronistic label. Today's vehicle connectivity megatrend will be the catalyst of an expanded fleet business model focused on managing a new connected vehicle ecosystem. This fleet ecosystem will encompass not only the vehicle, but also the mobile workers and, more importantly, the work they performed and the tools they use.